Commodity Creep: Are You Managing It?

‘These owners failed to see their actions had built a value proposition that attracted discount chasers.’

1. Beware of "lowest" pricing
   Last year, I consulted with an international lodging brand and spent time in the field interviewing a cross-section of its franchisees. I was struck by how these owners fell into two different "branding" camps: One group fervently believed lowest price was the only way to win customers, and its focus was all about ways to preserve the company's lowest-price positioning. Conversely, the second camp of franchisees envisioned the properties as an exceptional lodging value and the belief that while the organization offered an affordable rate, its focus should be all about delivering the most value-driven experience for the money.
   
   By making lowest price its marketing message, the first group of franchisees unwittingly built a customer base of discount-chasing customers. And these owners were learning the hard way that discount-chasing guests are never loyal customers. Any brand will do as long as the price is right.
   
   Yet, this franchisee group seemed unaware of the role it played in driving commoditization. These owners failed to see their actions had built a value proposition that attracted discount chasers. Instead, the owners held tight to the belief they were simply responding to customer-related market conditions. "All that today's customers care about is lowest price" was a comment I frequently heard.
   
   Lesson: An over-reliance on low pricing is a sure sign that commodity creep has hijacked your brand. Stop the denial. Own your commoditization problem. It's the first critical step to restoring your brand's competitive differences and winning the caliber of customer on which you can build a solid business.
   
   
   
   
   
   
   
2. Keep a careful eye on cost-cutting
   Ahh ... corporate cost-cutting and efficiency initiatives. Who would think that commodity creep is lurking in these projects? Starbucks Chairman Howard Schultz, for one.
   
   The Wall Street Journal reported that, on Valentine's Day 2007, Schultz sent a blunt memo to Starbuck executives via email with the subject line, "The Commoditization of the Starbucks Experience." In it, he wisely questioned whether the chain's aggressive growth and efficiency initiatives were now robbing the customer of the unique experience so pivotal to the brand's storied success. He cited numerous examples. About the chain's switch to automatic espresso machines, he wrote, "We solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre." The decision to move to this new machine, he wrote, "became even more damaging" because it "blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista."
   
   Few people understand more about building a memorable, loyalty-building customer experience than Schultz. And he knows commodity creep when he sees it.
   
   Lesson: Know your essential customer experience ‘hooks' (for Starbucks customers it is romance, theatre, engagement with barista, etc.) and aggressively preserve them. It's your biggest defense against commodity creep.
   
   
   
   
   
   
   
3. Study firms that thrive in commodity-infested markets
   Every loyalty maker can benefit from an ongoing pipeline of best practices for managing "commodity creep." But where should you look? Hint: Learn from successful firms whose basic product is a commodity.
   
   For example, Granite Rock's co-CEO Bruce Woolpert is an expert on thriving in a commodity-infested market. His family's 100-plus-year-old business quarries granite and has a dozen locations in California between San Francisco and Monterey. In an industry where low bid typically reigns supreme, Granite Rock customers have historically paid, on average, 6 percent more than they would with the competition!
   
   When Mike Lowenstein and I wrote our book, Customer Winback, we included a chapter titled, When You Think Your Customer Is Safe From Defection. Woolpert taught us plenty about limiting commodity creep by spotting hidden value differentiators.
   
   Citing one of many examples, Woolpert reported, "We thought we had done a great job after we had done our mining process and run the rock through the plant, and created these beautiful, uniform stockpiles of rock." But customer-value research showed Woolpert that getting customer trucks loaded and back on the road was more important to this segment of customers. "And so we developed a new system called Granite Express with our benchmarking partner Wells Fargo Bank. Our new system automatically loads trucks like an ATM machine."
   
   The truck driver simply swipes an authorization card that closely resembles a credit card and pulls the truck in, and a machine loads the truck automatically. This loading service is available to drivers 24/7. Woolpert reported, "It used to take 24 minutes from the time you left the public road to get loaded, get your sales tag and be out on the public road again. We've got that down to seven minutes now. And in California, a trucking minute is worth about $1.20, so that 17-minute savings is now something that cities and countries and contractors and individuals who come into our quarries can benefit from."
   
   How was Granite Rock rewarded? Market share doubled. And, explained Woolpert, "We did it, not by cutting prices, not by stealing our competitors' salespeople or any of those kinds of things. We did it by changing ourselves."
   
   Lesson: Experience is the best teacher, and commodity-infested markets naturally breed market-tested veterans brimming with commodity creep know-how.